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What demand trends in RE mean for your business

September 3, 2018

By: Marcelo Ocampo |Operations Improvement Advisor

As part of our day to day activities in the finance department, we come across interesting market trends that affect real estate assets in the U.S. Usually, the first concern when hearing about real estate market trends are either the changes in asset prices or the movement of rents.

However, property operators are affected in slightly different ways due to the inherent nature of their industry. Recently, we have come back to two very interesting topics that affect real estate nationwide in the U.S.: a rising preference for renting over buying from consumers, especially young ones, and an increase in foreign investment, especially in certain states such as California.

On the one hand, we know that both of these trends are good news for rent increases which is also good news for owners and operators. On the other hand, however, this growth also comes with consequences in the form of institutionalization for property managers as this inflow of institutional money demands a more sophisticated service. Below we talk about the facts we find more interesting.

The number of Renters is Increasing

Rental properties are overtaking the US housing market, with demand for townhomes and detached home rentals (single-family rentals, or SFRs) are growing faster than any other sector in the industry. Figures by the Urban Institute show that single-family rental units have seen a 30% growth rate over the past three years, now making up 35 percent of the country’s total of 44 million rental units.

So why are SFRs on the rise? The answer has to do with market conditions but also changing renter demographics. Recent graduates with high levels of student debt are finding themselves pushed out of the home-buyers’ market; this is exacerbated by restrictive mortgage credit, further relegating households to rental properties.

Furthermore, millennials (numbered about 71 million in the US) are now at the age of having families and establishing a household. While the number of households continues to increase, fewer families are living in homes they own. The above-mentioned barriers to home ownership have meant that in recent years, rental units have fulfilled almost all the demand for housing.

Increased Demand and Rental Prices

With more and more renters looking for single-family rentals, rents are increasing, making it the perfect time for investors to follow the trend and increase the profitability of their real estate portfolios. And while we may be inclined to believe that institutional investors would be jumping at the opportunity to acquire more SFRs in order to capitalize off the growing demand, predictions show that their numbers of single-family-home investments won’t be increasing any time soon. This leaves the market open for other investment, particularly by foreign players, to enter.

Foreign Investment in California

Across the country, foreign investment in real estate is down since last year, but that figure isn’t true for the golden state, where foreign investment in existing properties actually rose from 12 to 14 percent of all foreign purchases nationwide.

The number of foreign purchases in California can be interpreted as a display of confidence in the California real estate market, and this can be especially lucrative for single-family rentals. Chinese buyers continue to top the list and are most likely to purchase a single-family home to market as student housing.

Foreign Investment nationwide

The only state with a higher level of foreign purchases is Florida, which came in at 19 percent. Texas comes in after California at 9 percent.

Throughout the US, overall purchases by foreign buyers decreased from 6 percent. China still bought the most properties, accounting for about 15 percent of the total purchases.

The increase in demand for SFRs coupled with increased foreign investment trends in California represent a distinct opportunity for the acquisition of single-family rentals by foreign buyers.

Finally, we know that institutionalization takes time, effort and most of the time is costly, although there are some important advantages. In any case, to be a part of one of the major waves in the industry, property management companies should try to adapt their strategy and include this processes into it.